Ziopharm Oncology: Thinking Small

Generally in micro cap biotech investing, one encounters the classic "all or none" proposition: either the science works and the company flourishes or (more likely) the science fails and the investment result becomes part of an ever increasing tax loss carry forward. The very nature of VC financing encourages companies to find the next blockbuster drug in the hopes of an eventual big pharma buyout at multiples of a given market cap.

I believe that I may have found a company that is looking to take a different track. Ziopharm Oncology (NASDAQ:ZIOP) is thinking small; they are looking to build improved versions some of the existing cancer drugs to finance bigger projects down the road. Before we examine the pros and cons of this approach,let’s take a look at their pipeline.

Darinaparsin (ZIO-101) is a novel organic arsenic being developed for the treatment of various hematologic and solid cancers. Darinaparsin is being developed with the goal of avoiding toxic side effects and potentially expanding the application of this novel class of agents to a wide array of cancer indications. Unlike inorganic arsenic, preclinical and clinical studies show few serious toxicities associated with organic arsenic, particularly the ECG abnormalities seen at high doses.

Extensive ECG data has been collected as part of the darinaparsin development program and central tendency analysis revealed no significant drug effect on cardiac function comparable to inorganic arsenic. A Phase II trial is nearing completion in patients with primary liver cancer and advanced myeloma, a Phase II trial is ongoing in patients with lymphomas, and a Phase I oral trial is in progress. Palifosfamide (ZIO-201) is a proprietary stabilized formulation of isophosphoramide mustard (IPM), the active metabolite of ifosfamide.

Currently there are two lyophilized injectable salt formulations and one oral formulation of palifosfamide. Ifosfamide is an alkylating drug used to treat diverse cancers including testicular cancer, sarcoma, and lymphoma. Palifosfamide delivers only the cancer fighting component of ifosfamide without the two toxic metabolites of the parent drug that cause the debilitating side effects of “fuzzy brain” (encephalopathy) and severe bladder toxicity. Palifosfamide is currently in a Phase II randomized controlled trial with doxorubicin in patients with unresectable or metastatic soft-tissue sarcoma (PICASSO trial).

A single agent Phase II clinical trial in sarcoma has been completed and awaiting final data, a Phase I soft-tissue sarcoma combination trial with doxorubicin (Adriamycin®) is nearing completion, and an oral study is planned. Indibulin (ZIO-301) is a novel, unique targeted tubulin binding agent. It targets both mitosis and seeding.

Composite data for indibulin’s two Phase I trials was presented in July 2008 and two separate Phase I/II studies are currently underway, one in combination with Tarceva® and the other in combination with Xeloda®.

With ZIO-101(Darinaparsin), Ziopharm is looking to supplant the existing standard of arsenic treatment (Arsenic Trioxide) by offering doctors and patients a better drug and potentially far lower overall treatment costs due to the side effects associated with the current agent. ZIO -201 takes a similar approach in attempting to improve on the performance of an existing treatment agent (ifosfamide) with the hope of again offering better response with fewer negative ancillary effects. ZIO 301 takes aim at the taxanes (paclitaxel, docetaxel) and the Vinca alkaloids (vincristine, vinblastine).

The hope with Z-301 is that it may be able to overcome some of the drug resistance/toxicity issues frequently encountered by patients using these current drug regimes.

Now back to my thesis….I believe Ziopharm is attempting to use orphan status as a way to hit a few singles prior to taking the big swing. The company received orphan drug approval from the U.S. Food and Drug Administration for Palifosfamide for the treatment of soft tissue sarcoma. In October 2008, the European Medicines Agency’s (EMEA) Committee for Orphan Medicinal Products (COMP) followed suit.The strategy appears to be one of attacking niche disease to small to be attractive to the majors and then hoping for “off label” uses and eventual label extension.

Here's a summary of the pros and cons.

Pros:

Talent: Ziopharm Oncology is led by Jonathan Lewis, M.D., Ph.D. who is the company’s Chief Executive Officer and Chief Medical Officer. He is out of Sloan Kettering (NYC) and is well respected in the field. Dr. Lewis is not a dreamer; he believes the war on cancer(s) will be won by a series of incremental steps as opposed to a single magic bullet. An additional positive is the presence of Dr. Larry Norton who acts as a consultant to the company. If you are not familiar with Dr. Norton, I suggest you Google him. The results are impressive.

Market Capitalization: The Company has a market capitalization of less than $25 million as of 11/14/08. Part of this is based on a lack of coverage from Wall Street or may be the result of a combination of tax loss selling and perhaps some liquidations from former clients of lehman who was an early backer of the stock.

Ownership: Essex Woodlands is a large holder. From past dealings, I know that these guys do their homework. The Abu Dhabi Investment Company also owns a little over a million shares. Go figure!

Now the bad news.

Cons:

Illiquidity: This stock is illiquid and under followed. On many days fewer than 5000 shares trade.

Capital Needs: ZIOP has enough funds to get through 2009 and probably the first months of 2010. Staff was trimmed this year to slow the burn rate but the company does not have a track record of getting any commercial partnerships.

Bottom Line: ZIOP is an interesting speculation with a very low market cap. If any significant progress occurs over the next 6 months, I think we will see increased interest from either Big Pharma or perhaps some of the more aggressive PE funds. The market price and low capitalization probably precludes any of the remaining Wall Street BDs or major mutual funds from taking a look.

Short-Term Drivers: The company is hosting an analysts' meeting in NYC this week. Also, ASH is coming up in December. If there is any news, I will check back in with an update.

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